Reserve set to lift growth forecasts

Tim Colebatch

THE Reserve Bank is set to lift its growth forecasts again within weeks, as evidence increases that the global economy is recovering faster than expected.

Only weeks after the Reserve last upgraded its forecasts, its governor, Glenn Stevens, told the Senate economics committee in Sydney that it would revise them upwards again next month, and hinted the peak in unemployment might not be far off.

Called to testify on the Government's stimulus spending, Mr Stevens gave it support on almost every score, telling senators that without it, Australia would have gone into a deep recession. He estimated that the stimulus had lifted domestic demand by as much as 2 to 3 per cent, adding between $24 billion and $36 billion to Australia's economic activity.

But at the same time in Adelaide, the former chief economic adviser to previous US president George Bush told the Australian Conference of Economists that he was not convinced government stimulus packages were playing a significant role, and suggested the crisis had just turned out to be not that bad.

Related Content

Professor Edward Lazear, now at Stanford University, said the crisis was partly created by underdeveloped countries such as China investing in developed countries such as the US - a situation he likened to a graduate lending his parents money so they could buy a better car.

He said he could not speak for Australia, but it seemed to have escaped relatively lightly because it had been one of the lucky countries, not because of its fiscal stimulus.

Advertisement

Mr Stevens was the key witness at a hearing convened by Opposition and crossbench senators who want the Government to reduce its stimulus as the economy recovers.

But he gave them little joy. He played down concerns over the growth in Australia's debt, predicting it would end up much less than forecast in the May budget, and said even the forecast levels of debt would have little impact on the interest rates the Government pays.

''Australia borrows in a global market,'' he told Nationals Senate leader Barnaby Joyce. ''The long [interest] rate in Australia is driven more strongly by what happens in global markets than by what happens here, frankly.''

Mr Stevens conceded that if the Government stimulus lifted economic activity, then it would also tend to lift interest rates. But he told Victorian Liberal senator Scott Ryan the same would be true if demand were lifted by the income from increased exports to China.

''What we respond to is total demand, rather than where it comes from,'' he said. Cutting the stimulus would tend to hold down interest rates, but only because it would cut future growth.

Mr Stevens said interest rates were now at unusually low levels to fight the slump. But he stressed it would be dangerous to leave them there as the economy recovered. He said the Reserve would revise its forecasts again next month, and implied they would be lifted for the second time within weeks.